SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File Number 1-13427
STRATESEC INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 22-2817302
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7544 Fullerton Court
Springfield, Virginia 22153
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 912-9993
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange
Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X . NO .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of March 29, 2000 (computed by reference to
the closing price of such stock on the American Stock Exchange) was $14,382,149.
As of March 29, 2001 there were 10,272,964 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Portions of the Registrant's definitive Proxy Statement
regarding the 2001 Annual Meeting of Stockholders Part III
STRATESEC Incorporated
FORM 10-K
Cross Reference Sheet
Item Page
Part I
1 Business............................................................................................ 1
2 Properties.......................................................................................... 7
3 Legal Proceedings................................................................................... 7
4 Submission of Matters to a Vote of Security Holders................................................. 7
Part II
5 Market for Registrant's Common Equity and Related Stockholder Matters............................... 7
6 Selected Financial Data............................................................................. 8
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................... 9
7a Quantitive and Qualitative Disclosures About Market Risk............................................ 14
8 Financial Statements................................................................................ 14
9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.......................................................................... 14
Part III
10 Directors and Executive Officers of the Registrant.................................................. 14
11 Executive Compensation.............................................................................. 15
12 Security Ownership of Certain Beneficial Owners and Management...................................... 15
13 Certain Relationships and Related Transactions...................................................... 15
Part IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................... 15
Signatures ......................................................................................... 17
Part I
Item 1. Business.
General
The Company is a single-source provider of comprehensive
technology-based security solutions for medium and large commercial and
government facilities in the United States and abroad. The Company offers a
broad range of services, including: (i) consulting and planning; (ii)
engineering and design; (iii) systems integration; and (iv) maintenance and
technical support. This full range of capabilities enables the Company to
provide its clients with any combination of these services or complete turnkey
solutions for complex security projects. The solutions provided by the Company
include integrated security systems comprised of a command center managing one
or more subsystems or components, primarily access control systems, intrusion
detection systems, closed circuit television systems, critical condition
monitoring systems and fire detection systems. The Company is not aware of any
other company whose primary business is to provide this comprehensive range of
services on a national basis.
The Company serves more than 50 clients including airports, hospitals,
prisons, corporations, utilities, universities and government facilities. These
clients include Dallas Fort Worth Airport, Nokia, AutoFina, the Hearst
Corporation, EDS, Wachovia Bank, MCI WorldCom, Inc. and Alltel Corporation. In
addition, in December of 2000 the Company added a Government Division. The
Government Division also provides the same full range of security systems
services as the Commercial Division. The Company has an open-ended contract with
the General Services Administration (GSA) and a Blanket Purchase Agreement (BPA)
with the agency that allows the government to purchase materials and services
from the Company without having to go through a full competition. The Government
Division has completed projects for the U.S. Military and several other
government agencies throughout the world. These projects often require
state-of-the-art security solutions for classified or high-risk government
sites. The clients include the U.S. Army, U.S. Navy, U.S. Airforce, and the
Department of Justice.
The Company began operations in 1987 in association with a large
privately held engineering firm. In 1992, the Company became independent from
the engineering firm in conjunction with a capital infusion from a private
investment group. Since 1992, the Company has devoted a substantial amount of
resources and capital to enhancing its technical capability and services
offerings, hiring and training key personnel and expanding its client base. In
the fourth quarter of 2000 the Company merged with Security Systems Integration
(SSI) through an exchange of stock. This transaction added a very strong
Government Division to the Company. In addition to its headquarters office in
Springfield, Virginia, which is in the Washington, D.C. metropolitan area, the
Company has regional offices in Atlanta and Dallas and Sacramento, California.
Integrated Security Systems
Integrated security systems are comprised of one or more subsystems and
components that perform a variety of security functions for a facility or group
of facilities under the direction of a single command center. The command center
consists of a central processor, a common database and software that enable
various subsystems and components to communicate with each other and integrate
the subsystems and components into a single system. Subsystems and components
consist primarily of the following:
Access control systems, which are designed to exclude unauthorized
personnel from specified areas and provide access control that is typically
card-activated. Entry and exit activity can be monitored or recorded and may be
controlled on the basis of time and authority level.
Intrusion detection systems, which incorporate ultrasonic, infrared,
microwave and other sensors to detect unauthorized door and window openings,
glass breakage, vibration, motion and noise, and alarms and other peripheral
equipment.
Closed circuit television systems, which monitor and record entry and
exit activity or provide surveillance of designated areas. These systems can
deter theft and vandalism and support other access control systems. They can be
monitored either by a video recorder or by a monitoring screen.
Critical condition monitoring systems, which provide supervision of
various systems and processes such as sprinkler systems, heating and
refrigeration systems, power levels, water levels and general manufacturing
processes.
Fire detection systems, which incorporate heat, ionization, smoke and
flame sensing devices, manual pull stations, evacuation sounders and systems,
sprinkler systems and elevator controls.
The Company's Services
The Company offers a full range of security services, consisting of:
(i) consulting and planning; (ii) engineering and design; (iii) systems
integration; and (iv) maintenance and technical support. At the beginning of
each new client relationship, the Company designates one of its professional
staff as the client service contact. This individual is the focal point for
communications between the Company and the client and often acts as the client's
project manager for all of its security needs. The Company's engagement may
include one or more of the elements described below.
Consulting and Planning. Security consulting and planning are the
initial phases of determining a security solution for a project. The Company has
developed a planning process that identifies all systems, policies and
procedures that are required for the successful operation of a security system
that will both meet a client's current needs and accommodate its projected
future requirements. The Company's consulting and planning process includes the
following steps:
Identify the client's objectives and security system requirements
Review the existing security system plan
Survey the site, including inventory of physical components and software and
evaluation of client's existing infrastructure and security system
Identify and prioritize the client's vulnerabilities
Develop and evaluate system alternatives
Recommend a conceptual security plan design
Estimate the cost of implementing the conceptual plan
Develop a preliminary implementation schedule
As a result of this process, the Company provides the client with a
master plan for security services which recommends an effective security
solution that addresses routine operating needs as well as emergency situations.
The Company believes that its comprehensive planning process enables its clients
to budget for their security requirements on a long-term basis, identify
opportunities for cost reduction and prepare for future risks.
Engineering and Design. The engineering and design process involves
preparation of detailed project specifications and working drawings by a team of
the Company's engineers, systems designers and computer-aided design system
operators. These specifications and drawings detail the instrument sensitivity
requirements, layout of the control center, placement of equipment and
electrical requirements. Throughout the engineering and design process, the
Company utilizes its expertise in advanced technologies and its understanding of
its client's operational preferences to design a system that is functional,
cost-effective and accommodates the client's present and future requirements. In
addition, the Company attempts to incorporate its client's existing personnel,
equipment and other physical resources into the system design.
When retained as a single-source provider for turnkey security
solutions, the Company also selects the system components required under the
specifications and drawings it has prepared. To the extent possible, the Company
uses off-the-shelf equipment to minimize the cost of developing custom
equipment. The Company has made a strategic decision not to represent any
equipment manufacturer exclusively, thereby maintaining objectivity and
flexibility in equipment selection. The Company believes that its technical
proficiency with the products of a wide range of manufacturers enables it to
select components that will best meet a project's requirements.
Systems Integration. Systems integration involves (i) equipment
procurement; (ii) custom systems modeling and fabrication; (iii) facility
installation; (iv) hardware, software and network integration; and (v) system
validation and testing. In addition to these basic integration services, the
Company provides engineering services to enhance the compatibility of the
client's subsystems. The Company prepares technical documentation of the system
and operations manuals and provides on-site training to client personnel.
Under the supervision of a project manager, the Company's technicians
conduct hardware installation, hardware and software integration, system
validation and testing. The aspects of systems integration that do not require a
high level of technical expertise, such as wire installation and basic
construction, are typically performed by the Company's subcontractors.
Maintenance and Technical Support. The Company provides maintenance and
technical support services on a scheduled, on-call, or emergency basis. These
services include developing and implementing maintenance programs both for
security systems designed, engineered, or integrated by the Company and for
existing systems.
Maintenance services offered by the Company include its EMS, a database
used by the Company to effectively manage a security system's components,
maintenance planning and scheduling, and costs. The system configuration
function monitors system activity and capacity, and identifies the need to
reconfigure or expand the system. The system maintenance function schedules and
records maintenance activity, and identifies equipment replacement and upgrading
requirements.
Marketing
The Company's marketing activities are conducted on both national and
regional levels. The Company obtains engagements through existing contract
vehicles with commercial and government organizations, direct negotiation with
clients, competitive bid processes and referrals. At the national level, the
Company conducts analyses of various government agencies and industries and
targets those with significant potential demand for security solutions. At a
regional level, under the supervision of senior management, each office develops
and implements a marketing plan for its region. The plan identifies prospective
clients within the region and sets forth a strategy for developing relationships
with them. Each regional office works with the headquarters office in expanding
relationships with existing national, commercial and government clients to
include facilities within the region.
The Company has identified several key industries or facility types
that it believes have substantial and increasing requirements for security
services, including telecommunication and technology companies, corporate
complexes and industries and facilities for which security systems are required
by regulation. The Company has developed expertise in the security regulations
applicable to airports, pharmaceutical companies, prisons and nuclear utilities,
military chemical demilitarization facilities, U.S. Military installation
facilities and classified government facilities.
The Company's marketing strategy emphasizes developing long-term
relationships with clients that have multiple facilities and complex security
requirements so that the Company can continue to provide services over a
recurring basis after the initial contract. The Company undertakes significant
pre-assessment of a prospective client's needs before an initial contact is
made. A long-term relationship typically begins with an engagement to provide
consulting and planning or maintenance and technical support services.
Consulting and planning assignments place the Company in an advantageous
position, often as the client's project manager, to be engaged to implement the
plan ultimately adopted by the client. Engagements for maintenance and technical
support enable the Company to identify new requirements as they arise and to
offer its solutions to such requirements. In the Government Division, the
Company has developed strong relationships and open-ended contract vehicles that
allow the Company to provide recurring services to its customers for several
years. AS a result of successful performance, the Company receives positive
references and referrals from its existing customers to new government
customers.
The Company employs a variety of pricing strategies for its services.
Proposals for consulting services are priced based on an estimate of hours
multiplied by standard rates. Systems integration engagements are priced based
upon the estimated cost of the components of the engagement, including
subcontractors and equipment, plus a profit margin. Pricing for engineering and
maintenance services vary widely depending on the scope of the specific project
and the length of engagement. All proposals are reviewed by the Company's senior
management.
Many projects require that the primary contractor obtain a performance
bond in the amount of the contract. The amount of bonding that the Company is
able to obtain depends upon the level of its working capital and net worth. The
Company believes that prior to the initial public offering of its common stock
in October 1997, its ability to compete for larger projects as a primary or
independent contractor, rather than through a joint venture or subcontract
arrangement, was constrained by its inability to obtain adequate bonding. The
Company has since secured bonding with a major surety that will enable it to bid
as a primary contractor on larger contracts.
Clients
During the past three years the Company has provided services to
approximately 90 clients, including airports, hospitals, prisons, corporations,
utilities, universities and government facilities. The Company's clients have
included the following:
Airports and Aviation Corporations
Fresno Airport AT&T
United Airlines EDS
Washington-Dulles International Airport Gillette Corporation
Washington Reagan National Airport Hewlett-Packard Company
Yuma International Airport Lazard Freres
Seattle-Tacoma Airport Lucent Technologies
Dallas Fort Worth Airport Mary Kay Cosmetics
MCI WorldCom, Inc.
Mobil Corporation
NationsBank
US WEST
Wachovia Bank
Alltel Corporation
Koch Industries
Nokia
Fina Oil and Gas Company
Kodak
Amtrak
Hearst Corporation
Kaiser Permanente
Government Other
Los Alamos National Laboratory City of Baltimore Central
Sandia National Laboratory Booking and Intake Facility
Tennessee Valley Authority Moscow Local Telephone System
U.S. Department of Energy New York City's World Trade Center
U.S. Navy Rostelecom
U.S. Army Rowan County (N.C.) Prison
U.S. Department of Justice Washington Metropolitan
Area Transit Authority
During 2000, the U.S. Army, MCI WorldCom, Inc. ("MCI"), and Nokia
accounted for 29%, 19%, and 13% of the Company's earned revenues, respectively.
The loss of a significant portion of the revenue from any of these clients would
need to be replaced to avoid a material adverse effect upon the Company's
business, operating results and financial condition. Although the U.S. Army and
MCI WorldCom accounted for a substantial portion of the Company's revenue, work
performed for them was comprised of multiple projects at numerous different
facilities. The Company has diversified its client base by adding a strong
Government Division and by winning several new clients regionally and
nationally. The revenues from new clients are expected to more than replace any
reduction in revenue from the existing clients.
Competition
The security industry is highly competitive. The Company competes on a
local, regional and national basis with systems integrators, consulting firms
and engineering and design firms. The Company believes that it is the only
provider that focuses solely on its comprehensive range of security services to
government and commercial clients on a national basis. As a result, the Company
competes with different companies depending upon the nature of the project and
the services being offered. For example, the Company has competed with ADT,
Systems Technology Group (STG) and Mosler for systems integration work, and
Lockwood Greene and Holmes & Narver for consulting and planning and engineering
and design work. Many of its competitors have greater name recognition and
financial resources than the Company. The Company may face future competition
from potential new entrants into the security industry and increased competition
from existing competitors that may attempt to develop the ability to offer the
full range of services offered by the Company. The Company believes that
competition is based primarily on the ability to deliver solutions that
effectively meet a client's requirements and, to a lesser extent and primarily
in competitive bid situations, on price. There can be no assurance that the
Company will be able to compete successfully in the future against existing or
potential competitors.
Backlog
The Company's backlog consists of confirmed orders, including the
balance of projects in process. The backlog also includes projects for which the
Company has been notified it is the successful bidder even though a binding
agreement has not been executed. Projects for which a binding contract has not
been executed may be canceled at any time. Binding contracts may also be subject
to cancellation or postponement, although cancellation generally obligates the
client to pay the costs incurred by the Company. Long-term maintenance contracts
may be canceled without cause. As of December 31, 1999 and 2000, the Company's
backlog was approximately $6.7 million and $6.75 million, respectively. Backlog
as of December 31, 2000, includes projects having a value of approximately $2.5
million for which binding contracts have not been executed and all backlog is
expected to be completed during 2001. Backlog orders as of any particular date
may not be indicative of actual operating results for any fiscal period. There
can be no assurance that any amount of backlog will be realized. In addition to
backlog, the Company has potential follow-on projects with its existing
customers of another $19.7 million. These are projects which the Company has
been informed that are likely to happen over the next 12 to 24 months.
Employees
As of December 31, 2000, the Company had 87 employees, of which 40 were
based in the Company's headquarters located in Springfield, Virginia. The
balance work out of the company's regional offices. Thirteen of the Company's
employees are engaged exclusively in marketing and sales, 60 employees in
engineering, project management, and technical functions, and 14 employees in
executive management and administration. None of the Company's employees are
represented by a labor union and the Company believes its employee relations are
good.
Intellectual Property
The Company has developed its Engineered Maintenance System (EMS), a
database system used by the Company to effectively manage a security system's
components, maintenance planning and scheduling, and costs. In addition to EMS,
the Company is developing command center software that permits the integration
of multi-vendor security systems into a unified, integrated system.
Insurance
The Company maintains in force commercial umbrella liability insurance
with coverage of $10 million per occurrence and $10 million in the aggregate,
with a $10,000 deductible. The Company also maintains a $1.0 million insurance
policy to cover any error or omission by the Company that may result in a breach
of a security system designed, installed, maintained, or engineered by the
Company. There is no assurance that the amount of insurance carried by the
Company would be sufficient to protect it fully in the event of a significant
liability claim; however the Company believes that the amounts and coverages of
its insurance are reasonable and appropriate for its business operations. There
is no assurance that such insurance will continue to be available on
commercially reasonable terms, and the Company may elect not to retain liability
insurance at any time.
Item 2. Properties.
The Company's headquarters office is located in Springfield, Virginia,
which is in the Washington, D.C. metropolitan area. In addition, the Company
leases between approximately 2,000 and 4,000 square feet of office space in each
of the Atlanta, Dallas, and Sacremento metropolitan areas to support its
regional operations. The Company believes that its facilities are adequate and
suitable for its current operations, and that additional space is readily
available if needed to support future growth.
Item 3. Legal Proceedings.
There are no outstanding suits in which the Company is a defendant.
There are certain disputes with vendors arising from the normal conduct of
business which if not resolved could result in litigation. Management does not
believe the resolution of any litigation arising from such suits will materially
affect the reported financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year covered by this Report.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the American Stock Exchange
under the symbol SFT. The following table sets forth the quarterly range of high
and low closing sale prices per share for the Common Stock during the periods
indicated.
High Low
1999
First Quarter.............................. 2 3/8 1 1/2
Second Quarter............................. 1 7/10 1 1/5
Third Quarter.............................. 1 3/4 1
Fourth Quarter............................. 1 9/10 1
2000
First Quarter.............................. 4 1/8 2
Second Quarter............................. 3 7/8 1 7/8
Third Quarter.............................. 3 2
Fourth Quarter............................. 2 5/8 1 1/16
2001
First Quarter (through March 23, 2001)..... 2 3/4 2
The Company has not paid any cash dividends on its Common Stock since
its formation. It presently intends to retain its earnings for use in its
business and therefore does not anticipate paying any cash dividends in the
foreseeable future. The payment of any future dividends will be determined by
the Board of Directors in light of conditions then existing, including the
Company's earnings, financial condition and requirements, restrictions in
financing agreements, business conditions, and other factors. As of March 29,
2001, there were 150 holders of record of common stock.
In the third quarter of 1999, the Company issued 620,000 shares of its
common stock in exchange for $930,000 principal amount of its 10% senior notes
due December 31, 1999 at a conversion price of $1.50 per share. In the fourth
quarter of 1999 and the first quarter of 2000, the Company completed a private
placement of 1,204,855 shares of its common stock to a limited number of
sophisticated and/or accredited investors at a price of $1.50 per share for
aggregate cash proceeds of $1,807,282. In the first quarter of 2000, the Company
sold 700,000 shares of its common stock to a company at a price of $1.50 per
share for aggregate proceeds of $1,050,000 consisting of cash of $500,000 and a
note payable of $550,000. In the fourth quarter of 2000, the Company issued
1,650,000 shares of stock and reissued 350,000 shares of treasury stock in
connection with the Company's merger with Security Systems Integrations, Inc.
(SSI). Each of these transactions was exempt from the registration requirements
of the Securities Act of 1933 (the "Act") pursuant to section 4(2) of the Act
because they did not involve a public offering of securities.
Item 6. Selected Financial Data.
The selected financial data presented below (in thousands, except for
per share data) should be read in conjunction with the consolidated financial
statements and notes thereto of the Company and Managements' Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this report.
Year Ended December 31,
1999 2000
-------- ----------
(in thousands)
Statement of Operations Data:
Revenue............................... $ 14,716 $ 23,983
Cost of revenue...................... (10,238) (15,375)
---------- ----------
Gross profit....................... 4,478 8,608
Selling, general and administrative
expenses........................... (4,314) (7,179)
---------- ---------
Operating income................... 164 1,429
Gain on sale of plant and equipment... 1 1
Interest and financing fees........... (259) (748)
Interest and other income............. 15 75
---------- ----------
Income (loss) before income taxes.. (79) 756
Provision for income taxes............ (325) 800
---------- ----------
Net loss........................... $ (404) $ (44)
========== ==========
Basic and diluted loss per share... $ (0.05) $ (0.00)
========== ==========
Diluted income per share........... N/A $ (0.00)
========== ==========
Weighted average number of
shares outstanding:
Basic................ 8,099 10,027
Diluted.............. N/A N/A
Year Ended December 31,
1999 2000
---------- ----------
Balance Sheet Data:
Cash and cash equivalents............. $ 3,084 $ 887
Working capital (deficit)............. (6) 1,947
Total assets.......................... 9,878 10,999
Long-term debt, less current
maturities......................... 95 23
Total stockholders' equity
(deficiency)....................... 1,151 3,052
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company is a single-source provider of comprehensive,
technology-based security solutions for medium and large commercial and
government facilities in the United States and abroad. The Company offers a
broad range of services, including: (i) consulting and planning; (ii)
engineering and design; (iii) systems integration; and (iv) maintenance and
technical support.
The Company began operations in 1987 in association with a large
privately held engineering firm. As a start-up, the Company expended significant
capital on the development of the Company's business and infrastructure, and it
accumulated losses of approximately $2.8 million from 1987 through 1991 on
aggregate revenues of approximately $17.2 million. The Company's revenues from
1990 through 1994 were generated primarily by a contract to design and integrate
extensive security upgrades at three nuclear facilities for the Tennessee Valley
Authority (the "TVA"). In 1992, the Company became independent from the
engineering firm in conjunction with a capital infusion from a private investor
group. At the same time, the Company hired new management with extensive
expertise in the security industry. Since 1992, the Company has devoted a
substantial amount of resources and capital to enhancing its technical
capability and services offerings, hiring and training key personnel and
expanding its client base. As part of this effort, the Company opened four
regional offices in the United States. In November 2000, the Company acquired
SSI, a Security Systems Integration firm exclusively providing security systems
and services to the U.S. Government. The resources and contracts of SSI were
merged with those of the Company and became the Government Division of the
Company. The merger of SSI increased the yearly revenue of the Company by 40%.
The Company derives its revenue primarily from long-term, fixed-price
contracts. Earnings are recognized based upon the Company's estimates of the
cost and percentage of completion of individual contracts. Earned revenue equal
the project's total contract amount multiplied by the proportion that direct
project costs incurred on a project bear to estimated total project costs.
Project costs include direct labor and benefits, direct material, subcontract
costs, project related travel and other direct expenses.
Clients are invoiced based upon negotiated payment terms for each
individual contract. Terms usually include a 25% down payment and the balance as
stages of the work are completed. Maintenance contracts are billed either in
advance, monthly, or quarterly. As a result, the Company records as an asset,
costs and estimated earnings in excess of billings and as a liability, billings
in excess of costs and estimated earnings.
Results of Operations
The following table sets forth the percentages of earned revenues
represented by certain items reflected in the Company's statements of
operations.
Year Ended December 31,
1999 2000
---- ----
Revenue...................................... 100.0% 100.0%
Cost of revenue.............................. (69.6%) (64.1%)
--------- ---------
Gross profit.............................. 30.4% 35.9%
Selling, general and administrative
expenses.................................. (29.3%) (29.9%)
--------- ---------
Operating income.......................... 1.1% 6.0%
Gain on sale of plant and equipment.......... 0.0% 0.0%
Interest and financing fees.................. (1.8%) (3.1%)
Interest and other income.................... 0.1% 0.3%
Provision for income taxes................... (2.1%) (3.4%)
--------- -----------
Net loss.................................. (2.7%) (0.2%)
========= =========
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999
Revenue increased by 63.3% from $14.7 million in 1999 to $24.0 million
in 2000. The increase was due to an increase in revenue from government
projects, a significant increase in the Company's business base, the growth of
service and small installation projects, and increases in revenue from several
significant projects with the Company's existing customers. The Company's
commercial revenue increased by 40% from the previous year to $14.3 million. The
remaining increase in revenue was as a result of increases in revenue from
government projects.
Cost of revenue increased from $10.2 million in 1999 to $15.4 million
in 2000, primarily due to the increase in revenue. Gross margin increased from
30.4% in 1999 to 35.9% in 2000. Gross margins improved due to better project
controls and improved discounts with vendors.
Selling, general and administration expenses increased by 67% from $4.3
million in 1999 to $7.2 million in 2000. The increase was due to a significant
increase in the marketing and sales force as well as increased management
expenses due to the increased workforce and revenue. As a percent of revenue,
these expenses remained essentially level, at 29.3% in 1999 and 29.9% in 2000.
With the sales force and management structure increases during 2000 the Company
believes that it can now support a growth to revenue to $30 million annually
without significant additional selling, general and administrative. In addition,
reserves and write-offs of $412,000 in 1999 and $275,000 in 2000 are included in
the SG&A.
Interest expense and financing fees increased 189% from $0.26 million
in 1999 to $0.75 million in 2000 due to the increased use of an asset based
credit facility, and recording interests and fee of $300,000 as a result of the
merger with SSI.
Earnings before Interest and Taxes (EBIT) improved from $0.2 million in
1999 to $1.4 million in 2000. This improvement was as a result of the continued
improvement in gross margins and the increased revenue base.
Net income improved from a net loss of $0.4 million in 1999 to a net
loss of $0.04 million in 2000. This improvement was due to the continued
increase in revenue and gross margin.
Liquidity and Capital Resources
Through 1997, the Company funded its capital requirements with cash
generated by operations, private equity offerings, and its initial public
offering in October 1997. During April 1998, the Board of Directors approved the
issuance of up to $2.0 million of convertible subordinated debentures to provide
additional working capital. As of May 13, 1998, the Company had issued and sold
$1,450,000 of debentures. The Company sold an additional $400,000 of debentures
as of August 25, 1998. The debentures have an interest rate of 10%, are due on
December 31, 1999 and are convertible into common stock of the Company at $8.50
per share. In addition, the holders were issued 100 warrants for each $1,000 of
investment with an exercise price of $2.50 and a term of three years.
During February 1999, the $1.9 million the Company was required to post
as collateral for a bond pending its appeal of a law suit was released when the
trial court's judgment was reversed. The Company paid off $0.9 million of the
convertible subordinated debentures during the first quarter 1999. In September
1999 all of the holders of the remaining subordinated debentures agreed to
exchange their notes for the Company's common stock valued at $1.50 per share.
Additionally, to support the significant increase in business, the Board
approved a private placement of 500,000 shares at $1.50 per share, which was
subsequently increased to 1,204,855 shares. The board also approved the sale of
up to 21% equity in the company to a minority partner. Netcom Solutions
International subsequently purchased approximately 8% or 700,000 shares of the
Company at $1.50 per share. As of March 2000, $930,000 of debt was converted to
equity, $1.8 million was received by the private placement and $1.05 million in
the form of cash and a short-term note was received from the sale of a minority
interest.
The Company's principal capital requirements are increased working
capital needed to support its growth. The Company currently is funding its
working capital requirements with cash generated by operations and a receivables
factoring facility with a financial institution. As of December 31, 2000 the
Company had $0.9 million in unrestricted cash and working capital. The Company
is seeking additional financing to reduce outstanding aged accounts payable and
to provide the working capital to fund the increase in sales projected for 2001.
Forward-Looking Statements
This Form 10-KSB includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act. All statements, other than statements of historical fact, included in this
Form 10-KSB that address activities, events, or developments that the Company
expects, projects, believes, or anticipates will or may occur in the future,
including matters having to do with existing or future contracts, the Company's
ability to fund its operations and repay debt, business strategies, expansion
and growth of operations and other such matters, are forward-looking statements.
These statements are based on certain assumptions and analyses made by our
management in light of its experience and its perception of historical trends,
current conditions, expected future developments, and other factors it believes
are appropriate in the circumstances. These statements are subject to a number
of assumptions, risks and uncertainties, including general economic and business
conditions, the business opportunities (or lack thereof) that may be presented
to and pursued by the Company, the Company's performance on its current
contracts and its success in obtaining new contracts, the Company's ability to
attract and retain qualified employees, and other factors, many of which are
beyond the Company's control. You are cautioned that these forward-looking
statements are not guarantees of future performance and that actual results or
developments may differ materially from those projected in such statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 8. Financial Statements.
The Financial Statements of the Company, together with the reports
thereon of Keller Bruner & Company, LLP dated March 24, 2000 and Argy, Wiltse&
Robinson, P.C. dated March 23, 2001 are listed in Item 14(a)(1) and are included
at the end of this Report on Form 10-K, beginning on page F-1, and are
incorporated herein by reference.
Part III
Item 9. Directors and Executive Officers of the Registrant.
The information required by Item 9 will be contained in the Company's
Proxy Statement for the 2001 Annual Meeting of Stockholders under the captions
"Directors and Nominees" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934."
Item 10. Executive Compensation.
The information required by Item 10 will be contained in the Company's
Proxy Statement for the 2001 Annual Meeting of Stockholders under the caption
"Executive Compensation", and is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 11 will be contained in the Company's
Proxy Statement for the 2001 Annual Meeting of Stockholders under the caption
"Common Stock Ownership of Certain Beneficial Owners and Management", and is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information required by Item 12 will be contained in the Company's
Proxy Statement for the 2001 Annual Meeting of Stockholders under the caption
"Compensation Committee Interlocks and Insider Participation and Certain
Transactions", and is incorporated herein by reference.
Part IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) List of Financial Statements. The following is a list of the
financial statements included at the end of this Report of Form 10-KSB beginning
on page F-1:
Reports of Independent Certified Public Accountants
Balance Sheets as of December 31, 2000 and 1999
Statements of Operations for the Years Ended December 31, 2000 and 1999
Statement of Stockholders' Equity for the Years Ended December 31, 2000
and 1999
Statements of Cash Flows for the Years Ended December 31, 2000 and 1999
Notes to Financial Statements
(2) List of Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not
applicable or not required, or the required information is
provided in the financial statements or notes thereto.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on December 13, 2000 to
report a change in its independent public accountants under Item 4
of the report. The Company filed a report on Form 8-K on December
15, 2000 to report its merger with SSI. The report was amended on
February 13, 2001. The Company filed a report on Form 8-K on
February 23, 2001 to report a change in its independent public
accountants. The report was amended on February 27, 2001.
(c) List of Exhibits. The following is a list of exhibits furnished.
Copies of exhibits will be furnished upon written request of any stockholder at
a charge of $0.25 per page plus postage.
Exhibit
Number Exhibit
3.1 Form of Restated Certificate of Incorporation1
3.2 Form of Bylaws1
4 Form of Rights Agreement1
10.1 Stock Option Plan1
10.2 Employment Agreement with Ronald C. Thomas1
10.4 Consulting Agreement with Wirt D. Walker, III1
11 Computation of Net Income (Loss) Per Share
23.1 Consent of Keller Bruner & Company, LLP
23.2 Consent of Argy, Wiltse & Robinson, P.C.
27 Financial Data Schedule
1 Filed as an exhibit of the same number to the Company's registration
statement on Form S-1 (File No. 333-26439) and incorporated by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STRATESEC INCORPORATED
By: /s/BARRY W. MCDANIEL
Barry W. McDaniel
Co-President/Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ BARRY W. MCDANIEL
--------------------------------------
Barry W. McDaniel Co-President/Chief Executive Officer March 30, 2001
(Principal Executive Officer)
/s/CAMERON HASHEMI Co-President/Chief Executive Officer March 30, 2001
--------------------------------------
Cameron Hashemi (Principal Executive Officer)
/s/ WIRT D. WALKER, III Chairman and Director March 30, 2001
--------------------------------------
Wirt D. Walker, III
/s/ ALBERT V. GRAVES Chief Financial Officer March 30, 2001
--------------------------------------
Albert V. Graves (Principal Accounting Officer)
/s/ MISHAL YOUSEF SOUD AL SABAH
--------------------------------------
Mishal Yousef Soud Al Sabah Director March 30, 2001
/s/ ROBERT B. SMITH, JR. Director March 30, 2001
--------------------------------------
Robert B. Smith, Jr.
/s/ JAMES A. ABRAHAMSON Director March 30, 2001
--------------------------------------
James A. Abrahamson
/s/ CHARLES W. ARCHER Director March 30, 2001
--------------------------------------
Charles W. Archer
/s/ EMMIT J. MCHENRY Director March 30, 2001
--------------------------------------
Emmit J. McHenry
F-16
Index to Financial Statements
Report of Independent Accountants.........................................F-2
Independent Auditor's Report..............................................F-3
Balance Sheets as of December 31, 2000 and December 31, 1999..............F-4
Statements of Operations for the years ended December 31, 2000
and December 31, 1999.....................................................F-5
Statements of Stockholders' Equity for the years ended December 31, 2000
and December 31, 1999.....................................................F-6
Statements of Cash Flows for the years ended December 31, 2000
and December 31, 1999.....................................................F-7
Notes to Financial Statements.............................................F-9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of STRATESEC Incorporated:
In our opinion, the accompanying consolidated balance sheet and the related
statements of operations, of stockholders' equity, and of cash flows present
fairly, in all material respects, the financial position of STRATESEC
Incorporated (formerly known as Securacom, Incorporated) at December 31, 2000,
and the result of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
We have also audited Schedule II of STRATESEC Incorporated for the year ended
December 31, 2000. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
The financial statements of STRATESEC Incorporated for the year ended December
31, 1999 were audited by other independent accountants whose report dated March
24, 2000 expressed an unqualified opinion on those financial statements.
McLean, Virginia
March 23, 2001
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Stratesec, Incorporated
We have audited the accompanying balance sheet of Stratesec, Incorporated
(formerly known as Securacom, Incorporated), as of December 31, 1999, and the
related statements of operations, changes in shareholders' equity, and cash
flows for the year then ended (which financial statements are not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stratesec, Incorporated, as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles
before those statements were restated for the pooling of interests transaction
referred to in Note 3 to the financial statements. We have not audited the
financial statements of Stratesec, Incorporated for any period subsequent to
December 31, 1999.
We have also audited Schedule II of Stratesec, Incorporated, for the year ended
December 31, 1999 (which schedule is not presented separately herein). In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein before this schedule was restated
for the pooling of interests transaction referred to in Note 3 to the financial
statements.
Frederick, Maryland
March 24, 2000
STRATESEC INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 887,214 $ 3,084,443
Accounts receivable, net of allowance for doubtful accounts of
$350,000 in 2000, and $675,000 in 1999 3,953,660 2,421,374
Costs and estimated earnings in excess of billings on uncompleted
contracts 4,615,240 2,865,886
Inventory, net of allowance of $70,000 in 2000 and
$40,000 in 1999 370,882 245,903
Other current assets 45,150 9,346
--------------- ---------------
Total current assets 9,872,146 8,626,952
Property and equipment, net 675,913 799,671
Note receivable from stockholder 327,277 327,277
Deposits 124,068 124,576
--------------- ---------------
Total assets $ 10,999,404 $ 9,878,476
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,120,396 $ 3,278,116
Accrued expenses 1,020,746 719,673
Income taxes payable 1,245,000 286,000
Bank and other lines-of-credit 2,331,555 771,532
Billings in excess of costs and estimated earnings on uncompleted contracts 137,309 3,345,689
Capital lease obligations 69,642 72,860
Deferred income taxes 0 159,000
--------------- ---------------
Total current liabilities 7,924,648 8,632,870
Capital lease obligations 22,616 94,570
--------------- ---------------
Total liabilities 7,947,264 8,727,440
--------------- ---------------
Stockholders' equity
Common stock, $0.01 par value per share; 20,000,000 shares authorized;
10,280,043 issued and 10,279,964 outstanding shares in
2000, and 8,540,189 issued and 8,688,189 outstanding shares in 1999 102,800 85,402
Additional paid-in capital 24,279,914 21,686,907
Accumulated deficit (21,330,410) (20,824,359)
Less: treasury stock of 79 shares in 2000 and (98,000) in 1999, at cost (164) 203,086
--------------- ---------------
Total stockholders' equity 3,052,140 1,151,036
Commitments
--------------- ----------------
Total liabilities and stockholders' equity $ 10,999,404 $ 9,878,476
================ ================
STRATESEC INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
--------------- ---------------
Revenue $ 23,983,154 $ 14,716,439
Cost of revenue (15,374,922) (10,238,206)
--------------- ---------------
Gross profit 8,608,232 4,478,233
Selling, general and administrative expenses (7,179,379) (4,314,130)
--------------- ---------------
Operating profit 1,428,853 164,103
Gain on sale of equipment 0 1,601
Interest and financing fees (747,806) (258,984)
Interest and other income 75,122 14,604
--------------- ---------------
Income (loss) before income taxes 756,169 (78,676)
Provision for income taxes (800,000) (325,000)
--------------- ---------------
Net loss $ (43,831) $ (403,676)
=============== ===============
Basic and diluted net loss per share $ (0.00) $ (0.05)
================ ===============
Weighted-average shares outstanding 10,026,501 8,099,435
=============== ===============
STRATESEC INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000 AND 1999
Common Stock Treasury Stock Additional Total
------------------------ ---------------------------
Paid-in- Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
----------- -------- ---------- --------- ----------- ------------ ----------
Balance at January 1,
1999, as previously
reported 6,103,522 $ 61,035 (130,000) $ (181,851) $ 21,143,824 $ (19,800,705) $ 1,222,303
Adjustment in connection
with pooling of
interests (Note 3) 1,650,000 16,500 350,000 612,650 (227,805) 186,358 587,703
----------- -------- ---------- --------- ----------- ------------ ----------
Balance at January 1,
1999, as restated 7,753,522 77,535 220,000 430,799 20,916,019 (19,614,347) 1,810,006
Net loss 0 0 0 0 0 (403,676) (403,676)
Dividends paid 0 0 0 0 (401,245) (806,336) (1,207,581)
Purchase of treasury stock 0 0 (122,000) (227,713) 0 0 (227,713)
Conversion of debenture
bonds to common stock 620,000 6,200 0 0 923,800 0 930,000
Private placement of
common stock 166,667 1,667 0 0 248,333 0 250,000
---------- -------- ------------ --------- ----------- ------------ ----------
Balance at December 31,
1999 8,540,189 85,402 98,000 203,086 21,686,907 (20,824,359) 1,151,036
Net loss 0 0 0 0 0 (43,831) (43,831)
Dividends paid 0 0 0 0 0 (462,220) (462,220)
Private placement of
common stock 1,738,188 17,382 0 0 2,589,900 0 2,607,282
Sale of common stock 1,666 16 0 0 3,107 0 3,123
Purchase of treasury
stock 0 0 (98,079) (203,250) 0 0 (203,250)
-------------- -------- ---------- --------- ----------- ------------ ----------
Balance at December 31, 2000 10,280,043 $ 102,800 (79) $ (164) $ 24,279,914 $ (21,330,410) $ 3,052,140
========== ======== ========== ======== ========== =========== =========
STRATESEC INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
--------------- ---------------
Cash flows from operating activities:
Net loss $ (43,831) $ (403,676)
--------------- ---------------
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 280,228 201,322
Change in allowance for doubtful accounts and inventory obsolescence (295,000) 228,000
Loss on sale of equipment 0 (1,601)
Deferred income taxes (159,000) 39,000
Transfer of property and equipment to inventory 0 (140,308)
(Increase) decrease in:
Restricted cash 0 1,900,000
Accounts receivable (1,207,286) (190,488)
Costs and estimated earnings in excess of billings on uncompleted
contracts (1,749,354) (1,425,401)
Inventory (154,979) (44,845)
Other current assets (35,804) 165,615
Increase (decrease) in:
Accounts payable (157,720) 1,708,446
Accrued expenses 301,073 (322,938)
Income taxes payable 959,000 286,000
Billings in excess of costs and estimated earnings on uncompleted
contracts (3,208,380) 2,597,034
-------------- --------------
Total adjustments (5,427,222) 4,999,836
-------------- --------------
Net cash (used in) provided by operating activities (5,471,053) 4,596,160
-------------- --------------
Cash flows from investing activities:
Increase in notes receivable from stockholder 0 (490,000)
Principal payments received under notes receivable from stockholder 0 162,723
Proceeds from the sale of equipment 0 9,833
Purchases of property and equipment, net (156,470) (328,020)
Decrease (increase) in deposits 508 (66,477)
-------------- --------------
Net cash used in investing activities (155,962) (711,941)
-------------- --------------
Cash flows from financing activities:
Dividend payments (462,220) (1,207,581)
Net borrowings under bank line-of-credit 1,560,023 771,532
Repurchase of common stock (203,250) (227,713)
Proceeds from the issuance of common stock 2,610,405 250,000
Principal payments under capital lease obligations (75,172) (68,672)
Principal payments on debentures 0 (872,404)
-------------- --------------
Net cash provided by (used in) financing activities 3,429,786 (1,354,838)
-------------- --------------
Net (decrease) increase in cash (2,197,229) 2,529,381
Cash and cash equivalents at the beginning of the year 3,084,443 555,062
-------------- --------------
Cash and cash equivalents at the end of the year $ 887,214 $ 3,084,443
=============== ===============
STRATESEC INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of business and principles of consolidation
The accompanying financial statements include the accounts of STRATESEC
Incorporated (SFT) and its wholly-owned subsidiary, Security Systems
Integration, Inc. (SSI) (collectively referred to as the Company). SFT, formerly
known as Securacom Incorporated, is incorporated under the laws of the State of
Delaware to provide comprehensive security solutions for large commercial and
government facilities worldwide.
At December 31, 1996, SFT was approximately 91 percent owned by KuwAm
Corporation, two private investment partnerships (of which KuwAm serves as
general partner), Special Situations Investment Holdings, Ltd., and Special
Situations Investments Holdings L.P.II; and certain individual limited partners
of the investment partnerships (the KuwAm Group). On October 1, 1997, the
Company completed an initial public offering and sold 1,400,000 shares of common
stock and the KuwAm Group sold 808,000 shares of stock. At December 31, 2000 and
1999, the KuwAm Group owned approximately 11 percent and 38 percent of the
Company, respectively.
On November 30, 2000, the Company acquired Security Systems Integration, Inc.
(SSI). To effect the combination, SSI merged into a newly organized wholly-owned
subsidiary of the Company (Note 3). SSI is a security systems company that
provides design, engineering, installation, maintenance, technical support, and
training services, primarily to the federal government.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Use of estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions regarding certain types of
assets, liabilities, revenues, and expenses. Such estimates primarily relate to
unsettled transactions and events as of the date of the financial statements.
Accordingly, upon settlement, actual results may differ from estimated amounts.
Concentrations of credit risk and fair value of financial instruments
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash, money market funds and trade accounts
receivable. The Company places its cash and money market funds with high credit
quality institutions. In general, such investments exceed the FDIC insurance
limit.
The Company provides credit to its clients in the normal course of business. The
Company routinely assesses the financial strength of its clients and, as a
consequence, believes its trade accounts receivable exposure is limited.
The carrying value of financial instruments potentially subject to valuation
risk (principally consisting of cash, accounts receivable and accounts payable)
approximates fair market value.
Revenue recognition
The Company derives its revenue principally from long-term contracts, which are
generally on a fixed-price basis. Revenue on fixed-price contracts includes
direct costs and allocated indirect costs incurred plus recognized profit.
Revenue is recognized under fixed-price contracts on the
percentage-of-completion basis. The percentage of completion of individual
contracts includes management's best estimates of the amounts expected to be
realized on the contracts. It is at least reasonably possible that the amounts
the Company will ultimately realize could differ materially in the near term
from the amounts estimated in arriving at the earned revenue and costs and
estimated earnings in excess of billings on uncompleted contracts.
Contract costs include all direct material, direct labor and subcontract costs.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions
and estimated profitability, including those arising from contract revisions and
final contract settlements, may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.
The asset "costs and estimated earnings in excess of billings on uncompleted
contracts" represents revenue recognized in excess of amounts billed to clients.
The liability "billings in excess of costs and estimated earnings on uncompleted
contracts" represents billings in excess of revenue recognized.
Cash equivalents
The Company considers all highly liquid instruments with original maturities of
three months or less to be cash equivalents.
Inventory
Inventory consists of equipment and parts held for sale and is stated at the
lower of cost or market, with cost being determined by the first-in, first-out
method.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of property and equipment is
computed using the straight-line method over the estimated useful lives of three
to ten years. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the estimated useful lives of the
assets or the term of the related lease.
Income taxes
Income taxes have been recorded using the liability method. The income tax
provision includes federal and state income taxes both currently payable and
changes in deferred taxes due to differences between financial reporting and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Deferred tax assets and
liabilities are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
Loss per share
The Company has adopted SFAS No. 128, "Earnings Per Share" (EPS), which requires
public companies to present basic earnings per share and, if applicable, diluted
earnings per share. Basic EPS is based on weighted-average number of shares
outstanding without consideration of common stock equivalents. Diluted EPS is
based on the weighted-average number of common and common equivalent shares
outstanding. When dilutive, the calculation takes into account the shares that
may be issued upon exercise of stock options and warrants, reduced by the shares
that may be repurchased with the funds received from the exercise, based on the
average price during the year.
Stock options and warrants have not been included in the calculation of dilutive
earnings per share as their inclusion would be antidilutive.
NOTE 2 - OPERATIONS
As shown in the accompanying financial statements, the Company has incurred
recurring operating losses and has an accumulated deficit of $21,330,410 at
December 31, 2000. The Company's continued existence is dependent upon its
ability to generate profitable operations and, if necessary, secure financing to
fund future operations. Management is addressing these matters by reducing
overhead expenses and reorganizing the Company's management structure.
Management believes that actions previously and presently taken to revise the
Company's operating and financial requirements are sufficient to fund future
operations.
NOTE 3 - BUSINESS COMBINATION
On November 30, 2000, the Company acquired Security Systems Integration, Inc.
(SSI) in a business combination accounted for as a pooling of interests. SSI
became a wholly-owned subsidiary of the Company through the exchange of
1,650,000 in newly-issued shares and 350,000 in treasury shares of the Company's
common stock for all of the outstanding stock of SSI. The accompanying financial
statements for 2000 are based on the assumption that SFT and SSI were combined
for the full year. Financial statements for prior years have been restated to
give effect to the combination.
Prior to the merger, SSI paid cash dividends of $462,220 ($0.05 per share) and
$806,336 ($0.10 per share) in 2000 and 1999, respectively, and paid a return of
capital dividend of $401,245 ($0.05 per share) in 1999. Per share amounts are
based on the equivalent number of common shares that would have been outstanding
during these years, after giving effect to the pooling of interest in 2000.
Summarized results of operation of the separate companies for the period for
January 1, 2000 through September 30, 2000, the last completed quarter prior to
the date of acquisition, are as follows:
SFT SSI
--------------- ---------------
Net revenue $ 11,864,407 $ 6,869,531
=============== ===============
Net income $ 365,636 $ 1,215,931
================ ================
The summarized assets and liabilities of the separate companies on September 30,
2000, the last completed quarter prior to the date of acquisition, were as
follows:
SFT SSI
--------------- ---------------
Cash and cash equivalents $ 228,523 $ 67,667
Accounts receivable 4,237,962 1,063,929
Costs and estimated earnings in excess of billings on uncompleted
contracts 3,608,966 0
Other current assets 937,558 104,372
Property, plant and equipment, net 525,413 214,733
Other assets 78,061 377,277
--------------- ---------------
Total assets 9,616,483 1,827,978
Current liabilities (5,558,426) (2,121,197)
Noncurrent liabilities (43,515) (18,759)
--------------- ---------------
Stockholder' equity (deficit) $ 4,014,542 $ (311,978)
=============== ===============
The following is a reconciliation of the amounts of revenue and net income
previously reported for 1999 with amounts restated for the business combination:
Revenue:
SFT, as previously reported $ 10,631,131
SSI 4,085,308
---------------
As restated $ 14,716,439
===============
Net (loss) income
SFT, as previously reported $ (932,838)
SSI 529,162
---------------
As restated $ (403,676)
===============
Basic and diluted net (loss) income per share
SFT, as previously reported $ (0.15)
SSI 0.10
--------------
As restated $ (0.05)
==============
NOTE 4 - COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND BILLINGS IN
EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Cost and estimated earnings in excess of billings on uncompleted contracts, as
well as the related billings in excess of costs and estimated earnings on
uncompleted contracts, represent revenue recognized on long-term fixed-price
contracts based on the percentage-of-completion method less the related billings
to date. Revenue recognized in excess of billing is included in the asset
balance and billings in excess of recognized revenue is included in the
liability balance.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
2000 1999
---------- ---------
Office furniture and equipment $ 611,493 $ 611,493
Computer equipment 441,857 531,395
Leasehold improvements 191,836 191,837
Vehicles 159,251 143,619
Computer software 63,694 48,193
---------- ---------
1,468,131 1,526,537
Less: accumulated depreciation and amortization (792,218) (726,866)
---------- ---------
$ 675,913 $ 799,671
========== =========
Equipment purchased under capital leases approximated $342,000 at December 31,
2000 and 1999. Accumulated depreciation on those assets approximated $272,000
and $201,000 at December 31, 2000 and 1999, respectively.
Depreciation and amortization expense on property and equipment (including
equipment under capital leases) was $280,228 and $201,322 for the years ended
December 31, 2000 and 1999, respectively.
NOTE 6 - NOTE RECEIVABLE FROM STOCKHOLDER
The note receivable from stockholder (with an original balance of $490,000) is
unsecured, with installments of principal and interest (at 7.0%) of $3,260 due
monthly through September 2029. During the year ended December 31, 1999,
principal payments of $162,723 were received in excess of the amounts required
by the note receivable. Accordingly, no principal payments have been received
during the year ended December 31, 2000 and the remaining balance has been
classified as noncurrent.
NOTE 7 - BANK AND OTHER LINES-OF-CREDIT
Bank and other lines-of-credit consists of the following at December 31:
2000 1999
---------------- ----------------
Line-of-credit with financing company (maximum amount of 80% of eligible
accounts receivable), due on demand, with interest (computed as a discount
on amounts factored and the duration that the factored amount is unpaid)
due monthly. Discounts range from 2.5% - 4.5%. This line-of-credit is
secured by accounts receivable and inventory. $ 1,799,681 $ 771,532
Bank line-of-credit (maximum amount of $450,000), due on demand with interest
at the bank's prime rate (9.5% at December 31, 2000). The line-of-credit is
secured by a certificate of deposit, and expires, if not
renewed, on May 31, 2001. 450,000 0
Bank line-of-credit (maximum amount of $100,000), due on demand, with
interest at the bank's prime rate plus 1.75% (11.25% at December 31, 2000)
due monthly. This line-of-credit is secured by equipment and machinery
and expired on March 5, 2001. 81,874 0
-------------- --------------
Total $ 2,331,555 $ 771,532
============== ==============
Interest expense related to the lines-of-credit, which approximated interest
paid, aggregated $447,806 and $258,984 for the years ended December 31, 2000 and
1999, respectively.
NOTE 8 - NOTES PAYABLE TO STOCKHOLDERS
During April 1998, the Company's board of directors approved issuance of up to
$2 million in convertible subordinated debentures in an effort to provide
additional working capital. In 1998, the Company sold $1,850,000 of these
debentures to related parties, with 185,000 warrants attached to purchase common
stock of the Company at $2.50 per share. The debentures bear interest at 10
percent semiannually. The value of the warrants was $71,393 at issuance and was
determined by the Company, using the Black-Scholes valuation model and was
recorded as additional paid-in capital. All 185,000 warrants are outstanding at
December 31, 2000, but expire in April 2001.
During February 1999, the Company paid $872,404 of the outstanding $1,802,404
debt at December 31, 1998. During September 1999, the remaining $930,000 of
debentures was converted to 620,000 shares of common stock at $1.50 per share.
NOTE 9 - ACCRUED EXPENSES
Accrued expenses are summarized as follows as of December 31:
2000 1999
----------- ----------
Accrued payroll and related liabilities $ 228,669 $ 105,643
Legal judgment 262,290 262,290
Accrued interest and penalties 300,000 0
Directors fees 17,500 0
Sales tax 111,666 38,649
Other 100,621 313,091
----------- ----------
$ 1,020,746 $ 719,673
============ ===========
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company issued subordinated debentures in the amount of $1,850,000 with
185,000 warrants attached and incurred related interest to the KuwAm Corporation
and other related parties of $180,992 for the year ended December 31, 1998. No
interest was incurred under these debentures during the years ended December 31,
1999. In 1999, the Company paid, in two separate transactions, $872,404 and
issued 620,000 shares of common stock to extinguish the debt.
During 1999, the Company sold 166,667 shares of common stock in a private
placement at a price of $1.50 per share to two related parties.
During 2000, the Company sold 175,688 shares in a private placement at a price
of $1.50 per share to one related party.
During 2000, the Company entered into a noncancelable lease agreement with a
stockholder for office space in Springfield, Virginia. The lease agreement
provides for payments of $10,000 per month through December 31, 2005 and has
been included in the operating lease commitment schedule in Note 17.
NOTE 11 - STOCK WARRANTS
In conjunction with its initial public offering in 1997, the Company issued to
the underwriter, at a purchase price of $0.001 per warrant, warrants to purchase
up to an aggregate of 140,000 shares of common stock at an exercise price of
$13.18 per share, all of which are outstanding at December 31, 2000. These
warrants expire on October 7, 2001.
NOTE 12 - EMPLOYEE STOCK OPTIONS
In 1997, the board of directors approved the adoption of the 1997 Stock Option
Plan. The 1997 Stock Option Plan provides for the grant of nonqualified options
to purchase up to 500,000 shares of the Company's common stock and was amended
to increase the grant of options up to 1,950,000 shares. Options may be granted
to employees, officers, directors and consultants of the Company for the
purchase of common stock of the Company at a price not less than the fair market
value of the common stock on the date of the grant. The term of all options
granted is three years and one month, with vesting occurring ratably over three
years.
The Company has elected to follow Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
measuring compensation expense for its stock warrants and options. Under APB No.
25, because the exercise price of the Company's employee stock warrants and
options is not less than the fair market value of the underlying stock on the
date of grant, no compensation expense is recognized. However, SFAS No. 123,
"Accounting for Stock-Based Compensation," requires presentation of pro forma
net income and earnings per share as if the Company had accounted for its
employee stock warrants and options, granted subsequent to December 31, 1994,
under the fair value method of that statement. For purposes of pro forma
disclosure, the estimated fair value of the warrants and options is amortized to
expense over the vesting period. Under the fair value method, the Company's net
loss in 2000 would have increased by $225,000 or $0.02 per share on a basic and
diluted basis. Under the fair value method, the Company's net loss in 2000 would
have increased by $186,000 or $0.03 per share on a basic and diluted basis.
The weighted-average fair value of the individual warrants and options granted
during 2000 and 1999 is estimated as $1.61 and $1.22, respectively, on the date
of grant. The fair values were determined using a Black-Scholes option-pricing
model with the following assumptions:
2000 1999
----------- --------
Dividend yield - -
Volatility 140% 125%
Risk-free interest rate 5.50% 6.48%
Expected life 3 years 3 years
Stock option activity during the years ended December 31, 2000 and 1999 is
summarized below:
Weighted
Average
Number Exercise
of Shares Price
Outstanding at January 1, 1999 610,000 $ 4.87
Granted 727,500 1.65
Exercised - -
Forfeited (174,500) 4.53
------------- --------
Outstanding at December 31, 1999 1,163,000 1.84
Granted 873,000 2.03
Exercised (1,666) 1.88
Forfeited (126,334) 2.48
------------- --------
Outstanding at December 31, 2000 1,908,000 $ 1.92
============= =======
The following table summarizes information concerning outstanding and
exercisable warrants and options at December 31, 2000.
Weighted-Average
Remaining Warrants and
Exercise Number Contractual Options
Price Outstanding Life (Years) Exercisable
-------------- ------------------- --------------- ----- ----------------
$ 2.375 170,000 0.19 113,333
2.500 93,000 0.42 62,000
1.500 288,000 1.26 142,667
1.875 339,000 1.05 113,000
1.250 145,000 1.50 48,333
1.500 520,000 2.93 -
2.750 253,000 2.50 -
3.000 100,000 2.25 -
NOTE 13 - INCOME TAXES
The Company's provision for income taxes differs from the amount of income tax
determined by applying the applicable federal and state statutory income tax
rates to the income (loss) before income taxes due to the Company's merger with
SSI, for which an income tax provision has been provided based on its income
before income taxes, and to changes in the SFT's valuation allowance, which has
been established for the net operating loss carryforwards and temporary
differences that are not presently considered likely to be realized.
The provision for income taxes consists of the following for the years ended
December 31:
2000 1999
-------------- ---------
Current income taxes
Federal $ 806,000 $ 241,000
State 153,000 45,000
Deferred income taxes
Federal (134,000) 33,000
State (25,000) 6,000
-------------- ---------------
$ 800,000 $ 325,000
============== ===============
The deferred income tax asset results from differences in the bases for assets
and liabilities presented in the financial statements and the amounts reported
in the income tax returns.
2000 1999
---------- ---------
Current assets and liabilities
Allowance for doubtful accounts $ 140,000 $ 270,000
Unamortized Section 481 adjustment 0 159,000
Accrued vacation pay and other 19,000 21,000
Provision for legal judgment 105,000 105,000
Inventory allowance 28,000 16,000
---------- ---------
292,000 571,000
Valuation allowance (292,000) (412,000)
---------- ---------
Net current deferred tax asset (liability) $ 0 $ 159,000
========== =========
Noncurrent assets and liabilities
Depreciation $ (39,000) $ (39,000)
Net operating loss carryforward 8,422,000 7,849,000
---------- ---------
8,383,000 7,810,000
Valuation allowance (8,383,000) (7,810,000)
---------- ---------
Noncurrent deferred tax asset (liability) $ 0 $ 0
========== =========
During the years ended December 31, 2000 and 1999, the valuation allowance
established for the net operating loss carryforwards and temporary differences
that are not presently considered likely to be realized were increased by
$453,000 and $360,000, respectively.
As of December 31, 2000, the Company has net operating loss carryforwards of
approximately $21,100,000, which expire, if not utilized, in various years
through 2020.
The ability of the Company to utilize net operating losses of approximately $3.5
million, which were incurred prior to 1992, may be limited due to significant
ownership changes that have occurred since these losses were created.
The Company's initial public offering (IPO) also created an ownership change,
however, net operating losses of approximately $8.7 million incurred after 1992,
but before the IPO, are expected to be utilized, if sufficient income is
generated before they expire.
NOTE 14 - RETIREMENT PLAN
The Company maintains a defined contribution 401(k) profit sharing plan (the
Plan) for all employees who have attained the age of 21 and completed three
months of service. Participants may make voluntary contributions to the Plan up
to the maximum amount allowable by law, but not to exceed 15% of their annual
compensation. The Company contributes an amount equal to 25% of the lesser of
each participant's voluntary contribution or 5% of their annual compensation.
Company contributions to the Plan vest to the participants ratably over a two
year period. Company contributions to the Plan were $27,000 and $20,000, for the
years ended December 31, 2000 and 1999, respectively.
NOTE 15 - EMPLOYMENT AND CONSULTING AGREEMENTS
The Company entered into a consulting agreement with its chairman (who is also
managing partner of KuwAm Corporation) which provides for an annual consulting
fee of $145,000 through March 31, 2002. As of February 1998, the annual
consulting fee under this agreement was reduced by 10 percent.
NOTE 16 - SIGNIFICANT CLIENTS
During the year ended December 31, 2000, contracts with three clients accounted
for approximately 29 percent, 19 percent and 13 percent of revenue. For the year
ended December 31, 1999, contracts with three clients accounted for
approximately 33 percent, 9 percent and 7 percent of revenue.
NOTE 17 - COMMITMENTS
The Company leases office space for its headquarters in Springfield, Virginia
and satellite facilities under the terms of noncancelable operating leases,
which expire at various dates through December 2005. The Company also leases
equipment and automobiles under the terms of capital lease agreements, which
expire at various dates through November 2002. The following is a schedule of
the future minimum lease payments required under operating and capital leases
that have initial or remaining terms in excess of one year as of December 31,
2000:
Capital Lease Operating
Years ending December 31, Obligations Leases
------------------------ ----------------- ------------
2001 $ 79,235 $ 257,000
2002 25,813 236,000
2003 0 179,000
2004 0 164,000
2005 0 164,000
-------------- --------------
Total minimum lease payments 105,048 $ 1,000,000
==============
Less: imputed interest (12,790)
--------------
Present value of minimum lease payments 92,258
Current portion of capital lease obligations (69,642)
-----------
Noncurrent portion of capital lease obligations $ 22,616
===========
Rent expense aggregated $287,000 and $242,000 for the years ended December 31,
2000 and 1999, respectively.